The Battle to Preserve an Incredible Loophole in New York’s Tax Code


Eight years ago, a whistleblower accused a credit card processor for many high-end Manhattan hotels, including the Waldorf Astoria and Trump Hotels, of dodging New York State taxes.

The person alleged that the company, POST Integrations, used the fact that it was headquartered in Arizona as an excuse for not paying in New York, despite doing much of its business there. The case went to court.

But instead of fighting over the central issue – whether POST Integrations knowingly committed tax evasion – the two sides spent years arguing whether the company had ever technically lied about it. The company first argued that he could not be accused of submitting a false file because he never filed this tax return in New York. And, in a way, they were right.

The New York state law that allows whistleblowers to report tax evasion has what critics say is a glaring loophole that protects the state’s most skilled tax cheats. Although filing a false tax return is criminal, the law does not allow whistleblowers to lay a charge without reporting a false record.

It’s still hard to prosecute someone who doesn’t pay the taxes they owe but is smart enough not to leave a paper trail.

Why on earth should it matter to the authorities whether someone committed tax evasion by filing a false tax return or never filing anythingasked Gregory Krakower, who drafted the original law more than a decade ago as an attorney for the New York Attorney General and fought to close the loophole; he is now an adjunct professor at Cardozo Law School. “If a large out-of-state corporation knowingly and improperly pays no taxes and never files a return, are we going to protect and empower that? It does not mean anything.”

But as bizarre as the loophole may be, it has survived multiple attempts to close it. Now, a bill to close the loophole is headed to New York Governor Kathy Hochul’s office — with a coalition of the state’s biggest business interests lined up in opposition.

A court authorized the continuation of the case against POST Integrations in 2017 based on another article of the law, which continues to this day. A lawyer for the company did not respond to a request for comment.

The loophole exists in a law that allows the Attorney General or whistleblowers to prosecute wealthy individuals and corporations who they believe are committing tax evasion.

New York is home to legendary tax evaders, like the hotel heiress Leona Helmsley and former corporate titan Denis Kozlowski. He dodged millions in fine art sales taxes and spent stolen corporate funds on such extravagances as a $6,000 shower curtain. In 2010, under the shadow of scandals like these, the state legislature updated the New York False Claims Act, an existing law against fraudulent statements to government, to include tax evasion.

“Why on earth should it matter to the authorities whether someone committed tax evasion by filing a false tax return or never filing anything?”

– Gregory Krakower, original law drafter

The new law allowed lawsuits against individuals or businesses with annual incomes over $1 million who owed at least $350,000. It allowed a whistleblower who files a successful lawsuit to receive approximately 20% of any tax revenue recovered.

Large and powerful interests were “apoplectic,” Krakower recalls. So in 2013, they fought back when the legislature again tried to change the misrepresentation law. Lawmakers passed a new provision that makes it a crime to “knowingly” defraud the state government, even if the offender never made a false statement or false record – but a group of Republicans inserted a loophole that excluded cases of tax evasion.

Proponents of closing the loophole fear it will favor companies outside the state. Like those who do business in New York but pretend otherwise or the wealthy snowbird who files in low-tax Florida but secretly spends most of his time in New York.

“These aren’t people the IRS could find on their own,” said New York State Senator Liz Krueger, who chairs the House Finance Committee.

Krueger sponsored a bill, which has passed the state legislature and is now heading to the governor’s office, that would close the loophole by making it a crime to “knowingly” commit tax evasion, which whether or not it implies a false record.

“It’s a silly little loophole that allows tax evaders to get away with tax evasion by carefully avoiding using a false record or filing a false New York tax return,” Krueger and the State Assembly Helene Weinstein, who sponsored the legislation in the general assembly, wrote in a recent letter to Hochul.

A broad coalition of statewide business councils and an organization representing thousands of employees at the Big Four accounting firms — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — all called on Hochul to veto the bill. . She vetoed a similar measure on New Year’s Eve in 2021, echoing their concerns that the bill is too broad and could involve businesses and accountants unaware that they owed taxes from the l ‘State.

“It’s a senseless little loophole that allows tax evaders to get away with tax evasion.”

– New York State Senator Liz Krueger

Krueger believes this latest version addresses those concerns, noting that the bill only criminalizes “knowledge” fraud. But the opposition holds firm.

“Why should we want to be held liable for behavior we don’t know exists or if our client provides us with fraudulent information? said Kevin McCoy, chair of the New York State Society of CPA’s Legislative Task Force.

“They should be worried that we’re writing a law where there’s accountability for them,” Krueger said. “They get paid to do things right.”

A Hochul spokesperson, Justin Henry, said it was reviewing the legislation.

Despite the loophole, the whistleblower law’s creators are touting it as a resounding success. Since 2010, New York has recovered approximately $585 million from tax issues. A hedge fund that claimed to be located in Alabama paid $70 million to the city and state. In 2018, Sprint settled with New York and the state for $330 million in unpaid sales taxes.

Since these fraud claims go through the court, they are not bogged down by the endless delays who deal with whistleblowers at the federal level, where the IRS handles tipping. At the same time, the total number of cases in New York, around 20 a year, has been modest – evidence, according to Krueger and others, that cases tend to be high quality and not types of shipments fishermen who once opposed the law. warned.

Other states have taken note. California and Connecticut lawmakers have tried to pass a version of New York’s whistleblower law. The District of Columbia passed a version in 2021 without the New York loophole.

Krueger and Weinstein’s bill is heading to Hochul’s office shortly, in which case she will have 10 days to sign the bill, veto it, or allow it to become law.

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